Texas Series LLC

A Series LLC is a slight variation of a traditional LLC. The primary difference between the two is that the Series LLC incorporates specific clauses into the Certificate of Formation and the Company Agreement that unlocks the ability to create an unlimited number of "series" or cells within the framework of a single LLC. Each series or cell has the characteristics of an independent LLC under the umbrella of a single LLC (aka Series LLC).

The term "Series LLC" is the correct terminology for the LLC itself, and "series" is the proper way to describe each unit or cell within the Series LLC.

The Secretary of State charges a filing fee of $300 for a Texas Series LLC (+$8.10 convenience fee if you file online as we do). We charge an additional $500 to create a new Texas Series LLC. Our flat fee includes the preliminary name search, 15-minute attorney consultation, preparation and filing of the Certificate of Formation, customized Company Agreement, Organization Meeting, Membership Transfer Ledger, and a 9-page letter about operating an LLC. We also charge +$75 to get an EIN and +$250 for a Company Book. The optional Company Book is a nice 3-ring binder where the documents above would be kept.

Lastly, we charge an additional $300/series to create each protected series or cell within the Series LLC.

The Texas Series LLC provides a means of insulating the assets of one protected series from the liabilities and obligations of the LLC and the other protected series, which is a significant advantage over a traditional LLC (where all assets would be available to satisfy the liabilities and obligations of the LLC). The Texas Series LLC is ideal for real estate investors or other businesses with multiple significant assets or lines of business.

Cost:  The Texas Secretary of State charges a $300 filing fee to form a Series LLC (same filing fee as a traditional LLC or corporation). The Texas SOS does not charge for each new protected series.

Liability Protection: If operated properly, the debts, liabilities, obligations, and expenses incurred with respect to a particular series are enforceable only against the assets of that series and are not enforceable against the assets of the LLC generally or any other series and vice versa.

A Series LLC is named exactly like a traditional LLC. See the rules for naming a Texas LLC and our article on how to name a Texas LLC.

Each series of the Series LLC will require a formal name. See our article on how to name a protected series.

One downside to a Series LLC is that the legislature created a caveat to the firewall associated with a protected series. The firewall only exists if the records maintained for a particular protected series account for the assets associated with that protected series separately from the other assets of the LLC or any other protected series. It should be easy to comply with this caveat, but you may have to prove compliance every time a protected series is sued. Proving compliance will likely require a hearing and the disclosure of records/financials (which will feel very intrusive, especially when handing over to an adversary).

In addition, the Series LLC is a relatively new entity, and the case law is less developed than other entities, such as the traditional LLC. As such, Series LLCs are not for everyone. More predictable asset segregation comes from multiple entity filings. The Series LLC is best suited for those who have decided that the costs to file and maintain multiple entities are not justifiable.

The Texas Series LLC may not be appropriate in the following situations:

• Where the tax and financial information of one series needs to be kept confidential from the members of another protected series.
• Where some protected series will be engaged in for-profit activities, while other series will be engaged in not-for-profit activities.
• Where combined reporting for Texas franchise tax purposes will cause issues with allocating the franchise tax burden to each protected series.
• Where the activities of one protected series create a substantially higher level of liability than the other protected series.
• Where it won't be easy to keep precise records for each separate protected series, especially in connection with the ownership of assets (i.e., If each series is based out of the same office and the various assets are used by multiple series).
• Where a protected series will need to borrow from an institutional lender.

Dividing assets and liabilities into different series, all within the framework of one LLC, can avoid many inefficiencies and costs associated with multiple LLCs.

Real estate investors who hold multiple properties are the ideal candidates for the Texas Series LLC. Read our full article, Series LLC for Real Estate.

A Series LLC is just a type of LLC.  In other words, all of the benefits of a traditional LLC (ease of use, informal management, limited liability for the owners, asset protection, pass-through taxation, etc.) are also benefits of a Series LLC.

What makes a Series LLC unique is its ability to create separate and distinct cells (aka "protected series") within the framework of a single LLC and the associated benefits of this characteristic.

Each protected series can do almost anything an LLC can do, while also providing a liability barrier so that the assets of one protected series are insulated from the liabilities of the others. In other words, each protected series is a lot like an LLC. The ability to create one or more protected series instead of additional LLCs is where most of Series LLC benefits are found.

• Filing Fees Minimized. The Series LLC structure will require only one $300 filing fee (+$8.10 convenience fee if you file online as we do).
• Asset Protection. Assets of each protected series are protected from the liabilities of the other protected series.
• Reduced Admin. A Series LLC with multiple protected series requires less upkeep than multiple LLCs.
• Only one state registration. Only the parent/Series LLC must be registered with the state, which means only one annual report.
• Feels like multiple LLCs, but it is not. As such, no need to have multiple EINs, bank accounts, annual reports, federal returns, registered agents, accounting systems, etc.

• Relatively New Entity. The case law is currently developing, which means there is some uncertainty on the fringes (i.e., what happens if you use a Texas Series LLC to do business in a state that has not yet enacted a Series LLC statute?)
  
• Relatively Complex. Banks, CPAs, and insurance companies are still getting familiar with Series LLCs and what they can and should not do. Compared to a traditional LLC, a Series LLC is viewed as more complex.
  
• Accounting Issues. You'll need to keep great records to utilize a Series LLC. Keeping great records is the only way to maintain the liability shield between series.
  

Another issue that has not yet been resolved is whether each series must have a separate EIN. Each Series can get an EIN but only has to if (1) it will have separate and distinct employees or (2) a different tax classification than the Series LLC.

In a Proposed Regulation from 2010, the IRS has indicated that each protected series should be treated as a separate entity for federal income tax purposes. Because Texas law does not require separate bank accounts for the various protected series, it is tempting not to get separate EINs if a protected series will not have employees.

Under the proposed regulation above, each protected series of a Series LLC will be treated as a separate entity for federal income tax purposes. As a result, each protected series will be classified under the “check-the-box” regulations and may make any federal tax election it is otherwise eligible to make independently of any other protected series.

The name of the protected series should include the word "series." The most common naming structures for a protected series are:
[Name of LLC] - [Name of Series] -OR-
[Name of Series], a series of [Name of LLC]

Examples:

• ABC, LLC - Series 1
• ABC, LLC - 123 Main Series
• Superior Painting, a series of ABC, LLC

You can read our full article on How to Name a Protected Series for more detailed information.

The Texas Business Organizations Code (TBOC) addresses LLC wind ups in two places: Chapter 101 (LLCs) and Chapter 11 (Termination of Domestic Entities).

A basic wind up for a traditional LLC would generally entail three steps: (1) a wind up event, (2) notice to creditors if any; (3) the filing of a certificate of termination along with a certificate of account status.

Although a Series LLC is an actual filing entity, the various protected series are not. As such, step 3 above would not apply to a protected series. Section 11.103 of the TBOC confirms this concept: "a nonfiling entity terminates on the completion of the winding up of its business and affairs. The nonfiling entity must provide notice of the termination in the manner provided in the governing documents of the nonfiling entity if notice of termination is required under the governing documents."

Wind Up Procedures Specifically Related to a Protected Series

A protected series and its business and affairs may be wound up and terminated without causing the winding up of the LLC (or other protected series). The protected series terminates on the completion of the winding up of the business and affairs of the protected series. The LLC shall provide a wind up notice to known claimants in accordance with Section 11.052(a)(2) of the TBOC and in the manner provided in the company agreement, if applicable. The termination of the protected series does not affect the limitation on liabilities of the protected series.

Most Series Agreements will include a wind up process that tracks Chapter 11 of the TBOC. If the Series Agreement does not, you will want to look to the Company Agreement and then the TBOC for guidance.